Beware of BID and ASK Spread for Cars!

Lately out of curiosity, I decided to check out the value of my 7 year old Japanese car. A search at sgcarmart revealed that the same make/model/year cars would have asking prices of between $20,000 to $25,000 depending on mileage and month of registration.

I bought this car in 2006 for $46,000  (no loan) and the car has a residual value in 2016 of $6,000. This means the average depreciation over 10 years is $4,000 yearly, assuming a straight line depreciation accounting.

However, if I can sell my car at $22,000 now (lower end of asking prices), my average depreciation will be ($46,000-$22,000)/7 years =$3429.

This means that I should sell my car now, as if I have held to “maturity”, my depreciation will be at a much higher rate of $4,000 per year!

According to straight line depreciation of $4,000 per year, my car should be worth only $46,000 – ($4,000 depreciation x 7 years) = $18,000.

This calculation is similar to bonds valuation. We should be selling above PAR value since bonds will eventually move towards PAR value when it nears to maturity. However, the switch should be to another similar or higher yielding asset class to mitigate the opportunity costs.

Similarly, what should I switch to, if I were to sell my car now? Logically, I should use the bond valuation concept of comparing it with a 7 year old car. A search on the “car runs” showed similar Japanese/Korean makes, which doesn’t appeal to me, given that I will only be incurring transactional costs without having real benefit.

A 7 year old BMW 523i (2500CC) caught my eye. It has a residual value of $25,000, relatively low mileage of 90,000KM and costs $58,000. If I were to trade in my car for $22,000, I will only need to cough out $36,000 to drive for 3 years and receive $25,000 back in 2016. I will be $11,000 poorer (or $3666 additional costs yearly) in exchange for the experience to be a BMW 523i owner.  

Wow, so cheap after trade in!

 

The allure of it sounds too good to be true. I decided to call the 2^nd hand firm to find out more.

The car dealer is willing to offer what was stated on the sgcarmart website. However, they are only willing to take in $14,000 for my car.

This does not make sense to me. Even if there is a bid and offer spread, it should not be up to 44% {(25k-14k)/25k}

Imagine if I have to sell DBS at $9 (when it is trading for $15) to buy UOB at $19 which is trading at $19 on the same exchange (sgcarmart).

The dealer explained to me the last transacted price for similar cars of my ride was 20k. No one would offer higher than that and they need to earn a mark up (aka brokerage fee).

The high costs totally puts me off. My calculation will tangent off significantly if I were really to trade in my ride for 14k. My depreciation would be 4570 yearly (a 15% increase) and the cost of owning a BMW for the next 3 years will increase to 19k instead of the original expected 11k. 72% increase!!

It is not the 8k that matters (to me), but it goes against my principle of value, market efficiency and fairness. Why would I want to allow middle man to rip me off just because I have a 2^nd hand car to trade in? Why are car dealers “exempted” from transactional costs (whereby they can sell near asking prices) and I must sell my own car 40% below THEIR asking prices?!!  

Technically speaking, I can sell my car on my own first (at 20k-22k) and buy whichever car I fancy thereafter to avoid the hefty “bid ask” spread. This is similar to buying unit trust from fundsupermart at 0% and later transferring out to another service provider (free of charge) to avoid the quarterly platform fees at one and sales charge at another.

But this is too much of a hassle and I rather wait for my ride to be scrapped before shopping for a new/used car 3 years later.

 Notice I analyse general purchase of daily consumer products using frameworks for financial asset classes. This has been my thinking logic for many things and has helped me save/avoid costly decisions.